Good day, everyone, and welcome to the Jack in the Box Inc. Third Quarter Fiscal 2017 Earnings Conference Call. Today's call is being broadcast live over the Internet. A replay of the call will be available on the Jack in the Box corporate website starting today. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to Carol DiRaimo, Chief Investor Relations and Corporate Communications Officer for Jack in the Box. Please go ahead.

Thank you, Michelle, and good morning, everyone. Joining me on the call today are: Chairman and CEO, Lenny Comma; and Executive Vice President and CFO, Jerry Rebel. During this morning's session, we'll review the company's operating results for the third quarter fiscal 2017 as well as some of the guidance we issued yesterday for the fourth quarter and fiscal 2017. In our comments this morning, per share amounts refer to diluted earnings per share and operating earnings per share is defined as diluted EPS from continuing operations on a GAAP basis, excluding restructuring charges and gains or losses from refranchising. Our comments include non-GAAP measures, including operating EPS, restaurant operating margin and franchise margin. Please refer to reconciliations included in our earnings release. Following today's presentation, we'll take questions from the financial community. Please be advised that during the course of our presentation and our question-and-answer session today, we may make forward-looking statements that reflect management's expectations for the future, which are based on current information. Actual results may differ materially from these expectations based on risks to the business. The safe harbor statement in yesterday's news release and the cautionary statement in the company's most recent Form 10-K are considered a part of this conference call. Material risk factors as well as information relating to company operations are detailed in our most recent 10-K, 10-Q and other public documents filed with the SEC. These documents are available on the investors section of our website at www.jackinthebox.com. A few calendar items to note. Our fourth quarter and fiscal 2017 ends on October 1st and we tentatively plan to announce results on Monday, November 20th, after the market close. This is scheduled to be held at 8:30 a.m. Pacific time on Tuesday, November 21st. And with that, I'll turn the call over to Lenny.

Thank you Carol, and good morning. As you read in yesterday's news release, we're continuing to work with Morgan Stanley to evaluate potential alternatives with respect to Qdoba, as well as other ways to enhance shareholder value. The company has not set a timetable for completion of the evaluation process and we appreciate your patience while this effort is underway. We will not be taking any questions on this matter until after Morgan Stanley has completed its work and our brand has determined -- and our Board has determined next steps. And now let's talk about the quarter. Our third quarter performance was below our expectations, particularly with respect to restaurant margins. However, we were pleased that same-store sales and traffic for both brands improved sequentially, with Qdoba system same-store sales turning positive for the quarter and Jack in the Box system same-store sales coming in only slightly negative. At Jack in the Box, although we've screened some improvement from Q2, all of our transaction loss in Q3 was attributable to checks under $5. The competitive environment was dominated during the quarter by aggressive discounting throughout the industry. But after several quarters of lower commodity costs, we're beginning to see some inflation. We anticipate this will curtail some of the hypercompetitive discounting we've seen in recent quarters. Because we've traditionally approached discounting by value pricing bundled products instead of discounting single items, we should be in a good position to once again break through the noise. Our promotional strategy in the third quarter focused more on value in response to the competitive environment. We offered price pointed combos featuring either a barbecue bacon burger or barbecue bacon chicken sandwich, as well as a value priced Jumbo Breakfast Platter. We also continued to leverage innovation, which has long been a differentiating…

Thank you, Lenny, and good morning, everyone. Operating EPS for the quarter of $0.99 per share was $0.08 lower than last year as the benefit from lower G&A and our Jack in the Box refranchising initiative were more than offset by lower margins and costs related to the 31 formerly franchised Jack in the Box restaurants we took over in the quarter. Last year's results included a $0.05 benefit from a legal settlement. This quarter's results were negatively impacted by about $0.10 per share relating to the 31 restaurants I just mentioned, which was partially offset by a lower tax rate versus last year that benefited the quarter by about $0.04 per share. For Jack in the Box, the 1.6% decrease in company same-store sales was comprised of pricing of approximately 1.7%, mixed benefits of 1.1% and a decline in transactions of 4.4%. Franchise same-store sales were slightly positive for the quarter at 0.1%. Jack in the Box margins of 19.3% decreased by 320 basis points compared to last year. Margins were negatively impacted in the quarter by approximately 70 basis points related to the franchise restaurants that we took over in Q2 and Q3. Wage inflation of approximately 6% and costs -- and commodity cost inflation of nearly 5% as beef costs rose 17%. We also incurred higher repairs and maintenance costs of approximately 70 basis points in the quarter. Importantly though, when you look past all the noise in the quarter, the stores that we intend to continue operating when we reach the 90% franchise level add restaurants margin of greater than 23% in the quarter, even with the 6% wage inflation, commodity inflation of 5% and negative same-store sales. For Qdoba, same-store restaurants -- same-store sales, excuse me, increased 0.5% systemwide, but decreased 1.1% for company restaurants.…

[Operator Instructions] Our first question is from Brian Bittner of Oppenheimer.

I have a few questions. The first question's more of a housekeeping item question. As it relates to the $0.10 EPS headwind you quantified this quarter, can you just help us understand, are the dynamics such that this likely serves as a tailwind in the third quarter of next year? Or how do we think about how this flows through after this quarter?

So the -- if you want to think about these restaurants that we took back, the -- with the $0.10 charge, these were costs that related to not operated restaurants. As we closed those restaurants for a minimum of 6 weeks while we were getting them ready to reopen. So the costs included in there are such things as labor and rent and cost, such as that we needed to carry while we were getting these restaurants ready to reopen, and then we also have decided to close 3 of those sites in the quarter and we had charges related to that. So if you want to refer to this as a tailwind, I guess, that's fair, as we would not expect to have $0.10 of cost related to these restaurants in next year's third quarter.

Okay. And then, Lenny on the refranchising environment for Jack in the Box, a question I have on this is, can you just kind of talk about that environment in general? If you wanted to move more towards the 95% franchise end of the range, would this be something that would be executable, if the demand's such that you'd be able to get there if you wanted to?

Yes, I think it's fair to say that the demand hasn't waned. We anticipate landing somewhere between the 90%, 95% range. We haven't pinpointed a specific number in there, because some of it is just going to be associated with the deals that would be available and how that might attach to development, which has played out pretty well for us. But yes, demand is definitely there, and it's really just a matter of what makes financial sense for the company.

Okay, and then last question and I'll hand it off. As you exit 2017 shortly, what are your thoughts on what it's going to take to turn Jack in the Box comps back in to positive territory and what strategies should we be expecting out of you as you attempt to achieve this?

Yes, so I'll answer that question for both brands, because I think they're both in the same situation as far as sort of looking forward and putting 2017 in the rearview mirror. So for the Jack in the Box brand, I think first and foremost, the digital platform is being tested now in the form of a mobile app that provides a lot of functionality. It really helps to expand the convenience factor of the brand. We expect that with the single platform POS, we'll be able to move relatively quickly once that tests out, to get it into the hands of our consumers and throughout the entire system. So digital is a big piece of what should be launched in 2018. Also the expansion of off-premise or delivery is important, because the consumer is demanding it. Again that said also relates to the mobile app and the digital platforms because that will make it easier to use delivery. In addition to that, when we look at innovation, one of the things you'll see next year is, of course we'll continue to innovate premium products, but one of the shifts that we'll be making is we're actually going to innovate some value-oriented products, which is something we don't traditionally do. You see a few bundles and sometimes we'll discount individual items, but we don't typically put our innovation behind those types of products, the value items. Although we think the marketplace is going to change a little bit next year and that some of the aggressive discounting will wane, we still do anticipate that a certain level of it's going to be necessary, we want to make sure we do it the Jack way, which is really around innovation versus copying what others are doing and/or just targeting a single…

Our next question comes from the line of David Tarantino of Robert W. Baird.

Just a couple of questions on the comps for Jack in the Box. So the first one is really, how are you thinking about the trend you're seeing quarter to date, you mentioned at the low end of your guidance. Has that been a slowdown in the business in your mind, or is it more of a function of the comparison that you're cycling?

Yes, it's more a function of the comparison. As we said also, Jerry, I think in his prepared remarks talked about, the comparisons get a little bit easier. And then this week, we launched some new items into the marketplace that we think will fuel the back half of the quarter.

Great. So just to be clear on that, Lenny, is a 2-year trend or however you look at it, similar to what you saw in the third quarter, so far in the fourth quarter?

Yes, what I'd say is, our guidance for the fourth quarter, at the midpoint would imply stable 2 year trends between Q3 and Q4.

Understood, and then Lenny, among all the sales drivers you mentioned which it sounds like you have a lot going on, I guess one of the things that has been missing is sort of aggressive value message at the entry-level price point. I know you've got a few things in the $3 range, but just wondering what your thoughts are on either promoting or highlighting some of the even lower price point items you have on the menu, such as tacos and other items. So I'm wondering why the reluctance to get more aggressive at that end of the continuum?

Yes, I guess a couple of things I would say. One is that, we have done some things that are a little more aggressive price points, and I think what you have is, our voice is just getting drowned out by how much value is currently in the system. Arguably, if we go to lower price points, we might cut through some of that noise, but what we've made a decision to do is this: Instead of taking items like tacos or any other single price item that can get closer to the $1 to $2 price range that already exists on the menu and discounting it, which we believe is going to lead to a lot of trades. Instead of doing that, what we've asked our team to do is, innovate some new products that bring new news to the value side of the Jack in the Box menu, so that when we're promoting something, we're not just try to cut through the noise with a price point, but we also are trying to cut through the noise with a featured new item that the consumer hasn't eaten before, and is not a copycat of what any of the other competitors are doing. So that will take a little longer to put in effect, but you should anticipate that, that will be in full effect in FY 2018. And one additional thing I would just say, just for those who aren't as familiar with our brand, taco pricing, which traditionally was 2 for $0.99, now ranges 2 for $1.19 to $1.29. So we still have everyday value for that taco bundle, which is 2 tacos at that price point that we compete nicely with any of the other brands.

Our next question comes from the line of John Glass of Morgan Stanley.

First, Lenny, you had mentioned that commodity is -- prices are now starting to reinflate, and that's a good thing for you. Historically, from a competitive standpoint, historically, what's the lag between the commodity reinflation and the reduction in competitive discounting as it ends then? Is it a quarter, is it 2? How do you think about how long it takes for competitors to respond?

Yes, I think we're already seeing certain competitors respond, particularly those who use only fresh beef, and so I think it's going to be the individual competitors' mix of products that will determine that. It'll be hard to predict, what I would say is this: because we can't predict it, we're going to make sure that we have innovative, value-oriented products featured on the menu next year at the lower price points. That way, regardless of how long it takes, we're going after it. And then the benefit that we'll get maybe above and beyond just the innovation in the price points will be -- that competition will be doing less of it, which would give us even a higher take rate on what we're doing.

You said something about, that all of your transaction losses were at the low-end, I can't remember if you said $3 or $4, but there was something special that you said that was below which you lost your transactions. So are you saying that your comps, at the check average, is above that level are positive, and that everything else in the lower end is negative? Or have you seen just more of a mixed shift to those lower -- can you maybe just expand what that dynamic is, and if you stripped out the low end, is your business actually positive both in transactions as well as total comp?

Yes, so if you look at the traffic below the $5 price point, it's negative. And when you look at the traffic above the $5 price point, it's essentially flat. So yes, we're seeing a much healthier business above the $5 price point, and it becomes very obvious to us that all the pressures on the bottom side of the menu. In addition to that, we also see the brands with positive same-store sales are starting to see margin pressures. So if you think about the way that we have sort of navigated through 2017, we've tried to protect the equities of both of these brands, which although they exist on the lower price point side of the industry, they have a much higher take rate of premium items. And we don't want to erode those brands over the long term as we respond just to some short term pressures. At the same time, we understand that we've got to generate results. So at both brands, as I mentioned, one is innovating to bring some products to the menu, that's the Jack brand at lower price points. And the other, Qdoba, is looking at how to bring everyday value back to the menu. So we're going to be responsive. But again, we're doing it in a way that protects the long-term brand equity. Essentially when you look at some of the margin pressures from some of our competitors, if we're able to maintain a higher take rate of mid-tier and top-tier products that can protect our margins over the long term and make our brands more resilient. In addition to that, our franchisees, and keep in mind, that a large percentage of the industry is essentially run by franchisees who are paying royalties, rents and other fees. So we would expect that they would not be able to keep their financial positions healthy over the long term if we continue to discount even when commodities are more normalized, and then keeping -- we also need to be ready for the additional pressures that certain regulatory costs will bring to us like the increase in healthcare costs as well as increase in minimum wage. So there's a lot of pressures on the business, and I think it's going to be important for us that we manage our margins appropriately, and not just chase the competition in the short term.

Our next question comes from the line of Dennis Geiger of UBS.

There is improvement, some -- you've highlighted the operational improvement opportunities at both brands. So could you just comment on how close you are, just to where you want to be on each, and then how long it may take to get there? And I guess, as a follow-up to that, any way to think about what kind of drag, at least high-level, what kind of drag operations and service may have been in recent quarters, and how much of a driver that can be of comps as we look into '18.

I would say this, I wouldn't put the operational issues in the category as a drag on the quarter, and here's why. The operation's been consistently inconsistent for the last couple of years. And so, if you were to just sort of do a comparison of prior years versus 2017, it would be hard to say that operations have -- has changed so drastically that, that's what's the drag on the quarter. What we are seeing is that, in order for operations to be a driver of performance, we're going to have to eliminate the inconsistencies. Both brands have this issue. I would say Jack in the Box has more of the issue than the Qdoba brand. I'd say Qdoba is closer to where they want to be long term, but they're going to continue to address some of the inconsistencies they see. And I'd also say that Qdoba's situation is not only fleshing out those inconsistencies, but also making sure that as they innovate new products, the operations team is ready for that, because that's not the type of muscle that, that team has had in the past because we haven't really had new products. So there's work to be done to flesh out the inconsistencies, but also to make sure that we execute new products appropriately, so that we don't disrupt the organization. For the Jack in the Box brand, it really is a function of inconsistencies by restaurant or by operator. We have some operators that just need to improve the level of -- not only consistency, but overall, guest service in their operation. And those aren't things that just changed year-over-year. But our Brand President has really started to address those issues aggressively and we'll be ramping up the focus on those inconsistent restaurants and markets and/or operators going forward. So some of it's going to be more positive actions like training and preparing folks simply to do a better job. And then quite frankly, some of it will be holding, whether it be franchise or company operations accountable for performance and making critical changes along the way to drive that performance.

And then if I could just sneak one quick one. And just for Jack in the Box, anything you can share on regional or market performance differences during the quarter?

Yes, I'd say California still remains our better performer versus Texas, and that's been a phenomenon and that's occurred for several quarters here.

Our next question comes from the line of Jeff Farmer of Wells Fargo.

You guys acquired, I think, a total of 15 -- 50 underperforming franchise units over the last 2 quarters, it looks like. So my question is, why is this happening now? Could we see more, and how quickly could you sell these units or can you sell these units?

Yes, it's a good question, as a sort of a segue from my answer to the last question. I had mentioned that our Brand President, Frances Allen, is really trying to drive out some of the inconsistencies in the various marketplaces, or with specific operators and this is really an example of operators that weren't able to meet the brand standards, and that had led to some problems. There was a period of time to make corrective action, and unfortunately some of those actions weren't taken in a way that would have allowed the operation to continue in the franchisee's hands. So we did have to take those restaurants back. As far as our ability to sell those restaurants, there is demand for the restaurants as I entered, and I think the first question and we do expect to be able to turn those restaurants over. But one of the things that we want to make sure that we do, as a franchisor is set up the next franchisee for success, and that sort of ties into Jerry's answer or description of the downtime associated with these restaurants. So you got to think about this as restaurants that weren't operated properly. That means you've got training and facilities-related issues, people-related issues, that all need to be addressed. We shut them down so that we could sort of hyperfocus on those issues, get the restaurants in good shape, both on the facilities and people side, and then open them back up under our care. And now we're in a position to start to market those restaurants and turn them over.

Okay, and then unrelated, but following up on one of John's earlier questions. So did you see transaction stability with that below $4 or $5 average check level, whatever that check level is that you guys have been referencing, in the third quarter, the quarter you just finished, or were the transaction declines in the quarter actually a little bit greater than we saw in the fiscal second quarter. So just trying to figure out if some of your early-stage efforts to win back some of that lower average check business were successful, or if the declines mounted as you move through the current quarter?

Yes, good question. That's exactly the way we're looking at it. I think on the last call, conference call, I mentioned that we're losing traffic on the lower side of the menu. We got a little more specific on this call to explain that it's below the $5 price point, and what we see is that we've actually improved quarter on quarter below the $5 price point. So the efforts to bring value messaging to the menu are working. And then as we go into next year, as I said, we'll be even more of that and it'll be more than just price. Next year, it'll be price and new news, new products. So reasons for us to be bullish on our activities. It sort of is what it is right now, when we're muscling through the environment. But lots of reasons for us to be bullish, because even with our current ammunition, we saw an improvement quarter-on-quarter, and we will have new ammunition going into next year.

Our next question comes from the line of Andrew Charles of Cowen and Company.

Lenny, just following up on that last question. You mentioned the need to better enhance value and even though the value efforts did intensify in 3Q, the other performance relative to the NPD QSR sandwich index widen. So I guess, what gives you the confidence that value is the right strategy for the brand, and especially in respect for the brand's aspiration to become QSR+?

Yes, good question. I think a couple of things to think about. One, we don't believe that value is the only thing necessary to actually drive performance. We actually think that all the other things I mentioned in my long-winded answer earlier are going to be necessary. The consumer is really redefining convenience, and we're in the convenience business. So we're going to do some things to respond to that, which we've already either done or at least begun the test. The consumer's also demanding lower price points in the current environment, so we need to do some things to respond to that. And then, long term, we just think that our brand's going to lose its relevance if we don't remodel our sites and improve our service, at least to this place where it's sort of frictionless, which is again, becoming sort of one the redefinitions of service going forward. So I think we need to actually invest in all of those things, not just value. And I think that value is something that we'll have to double down on in this current environment and into 2018. But if you look at what our long-term plans would be, the QSR+, it would make a lot more sense for us to focus on a QSR+ positioning and try to get as close to that as possible, because it makes the brand more resilient. We can still play in the value space to the degree that's necessary if we're QSR+, but we get the benefit of the higher side of the menu having a higher take rate, which makes the margin stronger, and makes a more financially viable business for our franchisees as well. So I think that's what the focus will be. And when you look at NPD, the 2 year guest NPD improved 220 basis points. So if you just -- if you look at it over that longer period of time, I think you get a better indication of the brand health.

That's helpful. And then Jerry, just on -- given the lighter CapEx guidance for 2017, within the context of the multi-year capital plans you laid out at last year's Analyst Day, do you have any updated thoughts, we think about CapEx in 2018 and beyond, and particularly anything for the Jack brand which seems to be tracking a little higher than originally planned in 2017.

So no specific comments with respect to an update from what we talked about last year at the Analyst Day. Obviously, a portion of the CapEx, a great portion of that CapEx related to Qdoba, so we can't make any comments related to Qdoba going forward. And any increase in what Jack is doing, I wouldn't read too much into that. It's not as if we've expanded any additional program this year, although going forward, Lenny did talk about needing to remodel. So we do plan to do that going forward. But with respect to Jack remodels, we're in that capital plan that we laid out for you last year. So for Jack related, I'm not seeing anything significant changing. There may be some change within the timing of those expenditures, but not with regard to the expenditures.

That's helpful, and so last one if I could sneak it in. Just Jerry, how is the search for the successor going? I mean, obviously big shoes to fill, but you say you're still conducting first run interviews, or are you guys down to a short list?

Yes, this is -- I'll answer that one on behalf of Jerry, since I will put him in that awkward position to answer that question. So like you said, it will be big shoes to fill. We're at the early stages, so the list is still going to be rather large, and has not narrowed down at this point.

Our next question comes from the line of Gregory Francfort of Bank of America.

I have 2 questions. The first is on cash uses and if this review goes on for an extended period of time, without the ability to repurchase shares, would you consider doing a special dividend or let the cash balance build, how are you treating that?

So we are -- let me comment about it this way. The company still is very constructive with respect to returning cash to shareholders. While we have a pause currently, I'll remind you that we did repurchase $327 million of the stock already in the year, which was at an accelerated pace from what we had originally planned. So there's not a significant difference from what our annual plans were for 2017. And because we repurchased those shares earlier than what we had anticipated, if you look at the average shares outstanding this year from what we had expected that we would see, we're actually tracking at or a little under what we had expected the average shares outstanding to be. But I think, in the environment that we are right now, while the review continues, we don't think it would be appropriate to be in a market, and so we'll continue with that. But the Board continues to be supportive of returning cash to shareholders, and I just point to the evidence in May, when the Board authorized an additional $100 million of share repurchases and still have $181 million remaining under authorization, which expires in November of '18. So I'd look at this as a temporary pause, not a change in strategy.

And then just one question on the business. Can you help us understand the lift you're seeing from the DoorDash delivery test? And then also, I guess as McDonald's has rolled out delivery, have you seen any impact to your delivery efforts? Has there been any change, kind of post their move into the space?

Yes, we haven't shared specifics, so I'll just speak generally about it. A couple of things that really need to be considered as we move into delivery: one, we like the lift in average check that we see from delivery purchases; two, this works really well, particularly for the Jack brand, with late night business, that's probably one of the key areas where you would see a positive impact. Based on the early results, the transactions that we're getting through delivery are largely incremental. When we look at our late-night daypart versus our competitors, it has a higher share of the sales, at 17% of our sales. So these things all tie together really well and those are the reasons to be optimistic about delivery as it continues to evolve what we do to meet the consumers' demand. At the same time, when you look at some of the constructs associated with these delivery services, they aren't necessarily at a place where I think they will eventually end up. I actually think delivery services will get more competitive over time, and we think we'll need to see that for this to make sense, once we get to a place where everyone's doing it and it just becomes the way restaurants do business. When those transactions are not largely incremental, we'll need to see the service fees to be significantly more competitive than they are right now, to make sense for us over the long term. So as much as delivery is one of the things we have to do to respond to the consumer, we also think that the providers will have to also respond over time to how that business model needs to evolve.

Our next question comes from the line of Alex Slagle of Jefferies.

Thank you. The question on the Jack in the Box sales weakness in the lower income markets that you highlighted earlier in the year, is that still a contributing factor of your same-store sales performance or to what degree has that changed?

We -- I'm not prepared to comment on the lower income markets this time around, not because I wouldn't want to share it, but mainly because we didn't look at it through that lens because we're seeing broadly that the lower than $5 transactions is really the biggest driver of the erosion in transactions for any market. We think that's the bigger news. And now obviously, if we could make an assumption that the lower income markets continue to be the most challenged based on what we're seeing there. But once we're able to see that trend across all markets, it became evident that we not only needed to address it with more value-oriented price points and promotions, but also with some innovation. And I think that's sort of the biggest takeaway related to this at this point.

Okay, and then on Qdoba, if you could just provide a little bit more of an update on the new store performance sales trends you're seeing, and how the teams are ramping up the curve operationally to get to the efficiency levels that you're hoping to see?

Yes, so in general and maybe either Jerry or Carol may want to share some additional details. But in general, what we're seeing is -- which makes us very happy is that the new stores are coming out of the gates with a higher overall sales performance than previous generations of stores. We have a couple of factors that negatively impact the results of the most recent build, or the more recent builds and that is a lot of these were built as we were testing the remodel program, they weren't value-engineered. So the cost basis of some of the most recent stores is higher, which makes the returns or the breakeven sales levels a little bit higher. But when we look at the reengineered versions of these stores and what we've done in the preopening cycle, both in the training of the employees as well as the execution of the marketing, lots of reasons there to get very bullish. So I think, if I could eliminate some of the costs, said simply, if I could eliminate some of the costs associated with sort of the testing cycle of these remodels, and move on to the go-forward cost bases, and I couple that with what we're seeing in sales coming out of the gate stronger, there's lots of reasons to be optimistic about growing Qdoba.

Our next question comes from the line of Jeffrey Bernstein of Barclays.

Two questions. Just first, Lenny, maybe on the broader QSR burger category, it does seem your bigger 3 national burger competitors will have momentum all comping up 3% to 4%. I think you mentioned, or alluded to it earlier, but just maybe talk about what you see as the biggest 1 or 2 pros and cons of being one of the kind of smaller players. I know you mentioned your share voice gets drowned out, but I would have to imagine there are some positives in terms of nimbleness or otherwise. I was wondering how you think about yourselves relative to that group, whether maybe you're forced to play defense versus offense, or maybe even how historically Jack has performed when the other 3 big players will have momentum, maybe the they lift the whole category or, maybe they are taking share from you. But your thoughts, big picture on the big 3 players' momentum.

Yes, I think today we are in an environment that makes -- that gives the big 3 an advantage in that the consumer, particularly the lower income consumer, is struggling to stretch their dollars and they're seeking value. You then have historical -- historically high GAAP between Food At Home and Food Away From Home prices, with lower commodity costs. And it is putting wind behind the sails of any larger, value-oriented brand that wants to put a lot of value to the marketplace. So certainly that becomes challenging to us, and we see it in the transaction base below the $5 price point. What I would say, on the flip side of that, that all of you have experienced from brands like Jack in the Box, but particularly Jack in the Box, over the last 3, 4 years is that, some of the strength in our menu, our ability to historically drive higher margins has made our brand extremely resilient. And even when we're not comping to the degree that some of these other brands are comping, the strength of our margin has actually sustained our earnings and our earnings have driven some of our earnings growth in recent years. The size of our brand, as you stated, makes us very resilient. And although our comps are not matching those of the bigger players today, when you look at how we've been able to respond on the value side, and as I said, quarter-on-quarter, we've been able to mitigate some of the transaction loss below the $5 price point. I think that speaks largely to our ability to pivot when necessary, and based on what we expect to be the environment going into next year, we're prepared to pivot even greater through the use of one of our best…

Got you. And just my one follow-up. Jerry, I know from the press release I mean, the Jack margins were 19.3% and I think you mentioned you're at 85% franchised today. Just to make sure I got it right, you said if you just looked at the -- if you just own the 10% of stores that you plan on owning at a certain point in the future, and therefore 90% franchised, your company-operated margin would go up from 19.3% to 23%. So that's the case of the shift of 5 percentage points of units being that big of a lift. Just the common thread of those stores, you're selling them and sold, just a territorial and AUV issue, or are there some other, of course management issues? It just seems like it's a pretty large mountain that you're climbing, with the disposal of incremental 5% of units.

Well, remember that we had the restaurants that we took back from franchisees in Q -- in Q2 and Q3 negatively impacted margins by 70 basis points in the quarter. So I would look at that as 20% instead of 19.3%, just related to that. And then I would also talk about the 6% wage inflation and the 5% commodity inflation, where the restaurants that have the higher AUVs get a much better fixed cost leverage on that, so their margins, they're able to maintain even with those higher variable costs. And those restaurants that are in that 90%, if you just annualize the Q3 AUVs, they would annualize in terms of sale to be about $2.14 million per year, so well above what the other restaurants are doing. So I think to your earlier point, by and large, it's an AUV driver.

[Operator Instructions] Our next question comes from the line Matt DiFrisco of Guggenheim Securities.

I just have a follow-up question, actually on that one. With respect to the 70 basis points negative impact on your margins, how about the refranchised stores, what was the benefit that you had from those done in 2Q and the portion of those done in 3Q, or do you want to maybe disclose sort of how that might be on an annualized basis once they're complete for the year?

Yes, I think the more important thing, Matt, is because, there is a lot of noise, we refranchised units in Q2, we also refranchised units in Q3. The refranchised units in Q3 had a negative impact on the margin, vis–à–vis where we planned to be at the 90% level. And there is so much noise in the quarter with all the moving pieces, that's why we decided to just breakout. If you look at the 90% that we're going to continue operating, they were north of 23%.

But that's assuming you're going to be able to refranchise. The ones that you refranchise though, did they have a benefit in the quarter on a net basis?

Yes.

That was how much?

Yes, it's not a big leap to assume that we're going to be able to continue to re-franchise these restaurants, though.

So there was a net benefit, but it's not tangible enough or meaningful enough to disclose?

We were -- again, the restaurants that we're going to run at 90%, greater than 23% margin.

Okay. With delivery also, you mentioned that 17% of your business is late night. Is it too early to see it, or do you think that some of the comments we've heard from others that are doing deals with DoorDash in delivery, that they're seeing the greatest incremental growth in the late night hours, which is incremental business to them because they don't have a great presence there right now, whether that would either be Wendy's or McDonald's. So I was curious, is that, did you see that portion at 17% of your sales at late night, was that out-comping the rest of the system, or was that a lagger?

Yes, I don't know that we have that type of competitive intelligence by daypart, our competitors and certainly, the providers would not share that with us as that would be their confidential information. But here's what I would tell you. Brands are known for what they're known for, that the consumer believes that Jack in the Box is a late-night destination, and that's why I think we're going to be in their primary consideration set when they're looking to use delivery during late-night. Doesn't mean that some of the other folks might not find some incremental business there, they might, but most of the competitors are not -- do not have as many locations open 24/7 as we do. So the availability may not be there from all those competitors, even if the consumer wants to consider them. And driving that type of equity for the brand to make sense of opening those additional hours is really difficult to do, just like you've seen as other competitors have tried to get into the breakfast business, it's a long, slow process to get the consumers to change those habits and to understand that you don't have sort of new equities associated with your business, so. I think what we're really going to see happen with delivery over the long term, is -- and I'll just compare and contrast short term to long term. I think in the short term, we're all going to drive some additional purchase occasions, through delivery, we're all going to get more incrementality out of it than not. But essentially, once the entire industry across all segments is delivery enabled, and what's enabled is also digitally enabled through their apps and other means, I don't think this is going to be a competitive advantage. I think it's just going to be another means to an end for all consumers across any segment. And at that point, it'll go right back to what's your brand known for? Is it cheaper food, is it higher quality food, is it cravable flavors, is it late-night, Munchie Meals, what is it? And essentially, this sort of trend toward delivery to meet the consumer demand, I think is somewhat of a temporary phenomenon as far as incrementality is concerned. So we don't bank on this as a long-term driver for us as compared to our competitors. If it expands overall purchase occasions for the consumer, it becomes wind in the sails for everyone. But I don't think that you're going to have any specific restaurant brand, including Jack in the Box that will have a competitive advantage over the long-term, based on delivery.

Great. I think we are out of time. Thanks, everyone, for joining us today and we look forward to speaking to you all in November.

Thank you. And that concludes today's conference. Thank you all for participating. You may now disconnect.